As a small business owner, my income is somewhat variable, and I think I'd like to keep my e-fund at about $100,000. We do max out our tax deferred space, and plan on contributing ~$50,000/yr to our taxable accounts. I'm tempted to pay down mortgage #1 and investing $140,000 into my taxable savings vs ploughing $250,000 into my taxable accounts. My current asset allocation is 70/30 stocks/bonds. If I put all the extra cash in my taxable account I will have to purchase some muni-funds to keep that AA.

I'm tempted to pay off mortgage #1 but wanted the opinion of others smarter and more experienced than me before pulling the trigger.

bdpb wrote:I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.

+1 Without a doubt

+2

Knock out those mortgages. You have a nice amount of savings already and will be able to save even more once the mortgage(s) are gone. I'd look into muni bonds since you are in the highest tax bracket.

bdpb wrote:I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.

+1 Without a doubt

+2

Knock out those mortgages. You have a nice amount of savings already and will be able to save even more once the mortgage(s) are gone. I'd look into muni bonds since you are in the highest tax bracket.

Thanks all! That was my thinking as well, but it's nice to hear confirmation when it's that much money in one fell swoop (at least for us).

bdbp - you recommend paying off both mortgages? The larger one is one year into a 15 year at 3.375. At our marginal rate, that is only approx 2%.

As follow up - I did indeed pay off mortgage#1, the $110,000 HEL, but kept mortgage#2, the $384,000 15yr mortgage. This frees up a little over $2,000/mo in cash-flow, which I will add to my monthly taxable retirement savings. Thanks all for your advice.

SlightOfHand wrote:As follow up - I did indeed pay off mortgage#1, the $110,000 HEL, but kept mortgage#2, the $384,000 15yr mortgage. This frees up a little over $2,000/mo in cash-flow, which I will add to my monthly taxable retirement savings. Thanks all for your advice.

Congratulations.

I just noticed that PenFed just dropped their no cost 5/5 ARM down to 2.375% If you wanted to get just a bit more aggressive on paying down the remaining mortgage you could refinance with that loan and drop your interest rate by a full point for the next five years. It can go up by at most 2% in five years and it is then locked again in another give years. Since your current loan is at 3.375% that would give you five years at 1% lower when your balance is higher then in the worst case 1% higher then your current rate for the next five years when you balance is lower. As long as you get it paid off in ten years there would be no downside to this and if the rate adjustment in five years is better than the worst case then you could do very well.

I was in a different situation but I refinanced with this loan over a year ago with the plan of getting it paid off in about seven years and the only cost was a couple of hundred dollars for some local tax or fee that they did not cover.